Not too big to be accountable

Our opinion: A lawsuit against one of the key players in Wall Street’s home mortgage crisis could provide a measure of justice not just for investors but taxpayers, too.

A year ago, state Attorney General Eric Schneiderman was a voice in the wilderness, standing up to Wall Street, his counterparts in other states, and the Obama administration, refusing to go along with a settlement with banks that played a role in the mortgage crisis that helped wreck the economy. The $20 billion deal would have largely given those banks immunity from litigation.

Now, Mr. Schneiderman is co-chair of the Residential Mortgage-Backed Securities Working Group, a state-federal investigative body whose creation was the result of his determination not to let Wall Street off the hook. In that role, he filed suit this past week against JPMorgan Chase & Co. for alleged fraudulent practices that led to a crisis — one that took more than $1 trillion in federal bailouts and loans to keep from turning into an even worse catastrophe.

Win or lose this case, Mr. Schneiderman has scored a victory for principle. In the case of the banks, too big to fail must not mean too big to be held responsible.

This case is about whether one of the major players in the mortgage crisis, Bear Stearns, which has since been acquired by JPMorgan Chase, was guilty of more than merely making bad bets on securities based on sub-prime mortgages. The lawsuit alleges that Bear Stearns falsely assured investors that loans underlying the securities were sound and failed to do due diligence to ensure that they were — and even overlooked deficiencies when it found them.

These lapses, the suit alleges, stemmed from several factors: Bear Stearns’ quality control operation was overwhelmed with loans, and the firm failed to do anything about it, at least partly because it didn’t want to drive away the loan originators that were supplying all this business.

Bear Stearns investors lost about $22.5 billion on 103 securities, according to Mr. Schneiderman. And another $30 billion in unpaid principal remains, with nearly $13 billion worth of the mortgages 90 days past due, or in foreclosure, bankruptcy, or a bank’s possession.

That’s potentially $35 billion or more in losses in one bank, not including any punitive damages a court might award. And Mr. Schneiderman and the working group are still scrutinizing a number of other institutions. Little wonder that JPMorgan and other big banks, including Bank of America, Citigroup and Wells Fargo, were so eager to settle for $20 billion. On Wall Street that might be considered getting off cheap.

Because the statute of limitations on criminal charges in this situation is five years, none of the executives involved in these loans can face jail time as a result of Mr. Schneiderman’s probe. Two Bear Stearns executives who were criminally charged were acquitted in 2009, though they did later settle a civil claim for about $1 million between them.

A civil judgment in the new case could certainly bring a sense of justice if the allegations prove true, in several ways. There’s the justice of making duped investors whole, or substantially so. There’s the justice of, as Mr. Schneiderman put it, making clear that “there is one set of rules for all, no matter how big or powerful the institution may be.”

And there’s also the justice of affirming for taxpayers that they, too, weren’t duped. Back in 2008, when the government bailed out Wall Street, we were told it wasn’t to save rich bankers, but rather the very economy. That’s the real value of Mr. Schneiderman’s quest: a little justice for the rest of us, who may not have directly lost a dime in these schemes, but who have been paying a price nonetheless.

2 Responses

You conveniently fail to mention in your editorial that JP Morgan did NOT want to acquire Bear Stearns. They were coerced into it by the federal government and regulators who thought that if Bear Stearns went bankrupt it could lead to a disasterous, financial domino affect. If Bear Stearns had gone bankrupt there would be no entity for our attorney general to bring suit against. So the government determines that Bear Stearns should NOT go bankrupt. The government coerces a solvent bank to make the acquisition, and now another arm of the government wants to punish that bank, the entity they originally coerced into acquiring Bear Stearns for….acquiring Bear Stearns? This is quite a twisted and far reaching government agenda you promote.

Jack, you are right the Bush Administration had no right to make JPM absorb Bear, but that doesn’t mean the next administration should not do it’s job – the suit is seeking justice for the injured parties.

Schneiderman is responding to a sustained, widely supported outcry that no one was held accountable for the 2008 crisis. This is the crumbs Schneiderman fought for and got from Obama who was an inch away from letting the whole thing expire.

JPM is no angel, they absorbed Bear and creamed it’s top talent, it’s clearing business, its commodities trading and posh new Madison Avenue skyscraper right, across the street from JPMorgan headquarters.

Did JPM go through the securities and make the toxic, doomed instuments soluble? No.

Did they understand they were assuming the good with the bad for the $2 a share they paid? Yes.

With no criminal liability, this will all play out in fines. If you are upset at anyone, it should be the Bush administration for failing to spot this crisis a mile away, forcing rating agencies to fake AAA ratings, hoping he could limp along till the end of his term. The crisis was the capper to a ludicrous economic policy that extracted enormous wealth to hand down to our kids as deficits.